Financial Crisis Inquiry Commission report

[Chuckanut]

The Financial Crisis Inquiry Commission spent over a year looking into the causes of the financial crisis that has hurt our nation and the world.

You can find their report here:

Get the Report : Financial Crisis Inquiry Commission

You can find their conclusions here:

http://fcic.law.stanford.edu/report/conclusionsA

A few quotes:

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.

We conclude there was a systemic breakdown in accountability and ethics.

************************************************************

 

[Coolius]

They should have added:

We conclude that sheer greed and stupidity of commercial and government agencies, encouraged by the gross ineptitude of governments in the US and Europe is the underlying reason for the crises.

 

[pb4uski]

They should have added:

We conclude that sheer greed and stupidity of commercial and government agencies, encouraged by the gross ineptitude of governments in the US and Europe is the underlying reason for the crises.

Interesting observation. As I was reading the OP it struck me that there was no mention of the government's policy forcing financial institutions to make loans to people who normally would not have qualified for mortgages in the name of expanding home ownership which IMHO planted the seeds of the crisis. I guess there wasn't a mirror in the room they were writing the report in.

 

[eridanus]

Interesting observation. As I was reading the OP it struck me that there was no mention of the government's policy forcing financial institutions to make loans to people who normally would not have qualified for mortgages in the name of expanding home ownership which IMHO planted the seeds of the crisis. I guess there wasn't a mirror in the room they were writing the report in.

That's because there's no proof that this policy (the CRA) had any significant effect on the crisis.

The Commission addressed this claim in the report.

 

[justplainbll]

Interesting observation. As I was reading the OP it struck me that there was no mention of the government's policy forcing financial institutions to make loans to people who normally would not have qualified for mortgages in the name of expanding home ownership which IMHO planted the seeds of the crisis. I guess there wasn't a mirror in the room they were writing the report in.

Whether it be home mortagages or personal loans, my dad who started out as a repo man in the 1930s and wound up working for Chase, told me as early as 1978 that the banks were being coerced into making loans to 'unqualified' borrowers.

 

[pb4uski]

That's because there's no proof that this policy (the CRA) had any significant effect on the crisis.

The Commission addressed this claim in the report.

What "proof" would you expect? Did loans written with 80% LTV and <30% PITI/income fail or was it the more risky loans?

 

[eridanus]

What "proof" would you expect? Did loans written with 80% LTV and <30% PITI/income fail or was it the more risky loans?

CRA loans had a lower default rate than other subprime loans. The other subprime loans (>90%) were made by lenders that weren't under the purview of the CRA. In other words, it was market share that drove these loans rather than the CRA.

This is discussed in the report mentioned in the OP.

A better target for your ire might be the decision to not regulate CDSs or maybe the government policy (SEC) to allow excessive leveraging by those same banks that were bundling CDSs.

 

[donheff]

CRA loans had a lower default rate than other subprime loans. The other subprime loans (>90%) were made by lenders that weren't under the purview of the CRA. In other words, it was market share that drove these loans rather than the CRA.

This is discussed in the report mentioned in the OP.

This is the aspect that those who want to put the lion's share of the blame on Government fail to address. Absent the real abuse marginal loans based on CRA would not have precipitated a bubble or a crisis. They may or may not have been good policy but they didn't cause the crisis.

A better target for your ire might be the decision to not regulate CDSs or maybe the government policy (SEC) to allow excessive leveraging by those same banks that were bundling CDSs.

If you want to blame Government here is the real problem - a failure to reign in insanity.

 

[kcowan]

Once they broke the link between mortgage granting and mortgage servicing, they created the loophole that enabled unscrupulous mortgage brokers/underwriters to make easy money.

 

[Chuckanut]

Let's not forget the repeal of Glass-Steagal which opened commercial banking up to the risks of investment banking. As far as I know, Joe and Jill Average did not lobby for that. Guess who did?

 

[HFWR]

I don't need know stinkin' commission.

Cause: The music stopped...

 

[obgyn65]

Where were the auditors, especially PwC, E&Y, etc. ? Aren't they paid to to report on risk ?

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

 

[eridanus]

Where were the auditors, especially PwC, E&Y, etc. ? Aren't they paid to to report on risk ?

Evidently, they're paid to not report on risk as well.

 

[FinanceDude]

Where were the auditors, especially PwC, E&Y, etc. ? Aren't they paid to to report on risk ?

Probably the auditors were the same folks who used to work at Arthur Andersen before the Enron debacle.........I am sure the other Big 6 firms eagerly snapped them up.........

 

[l2ridehd]

There is certainly enough blame to go around. Banks that made high risk loans, government that pushed that policy, greed by everyone on both sides, government(S) that keep over spending with borrowed money, people who want more and more while paying less and less, import and export rules, lack of oversight and reporting on most of it, failure to act on issues, terrorism impact on economy, and probably a few others I failed to mention.

 

[MichaelB]

There is certainly enough blame to go around. Banks that made high risk loans, government that pushed that policy, greed by everyone on both sides, government(S) that keep over spending with borrowed money, people who want more and more while paying less and less, import and export rules, lack of oversight and reporting on most of it, failure to act on issues, terrorism impact on economy, and probably a few others I failed to mention.

You forgot global warming and acid rain. Or was it the commission?

 

[Brat]

I don't think risk is on the list for auditors.. they look at accuracy of numbers reported. The FDIC auditors are supposed to evaluate risk in banks under their jurisdiction. Many bad actors were not under any-one's jurisdiction or had weak supervision by state agencies.

 

[pb4uski]

Where were the auditors, especially PwC, E&Y, etc. ? Aren't they paid to to report on risk ?

No, they are not paid to report on risk. They are paid to report in whether the financial statements are fairly stated in accordance with generally accepted accounting principles.

If a client is taking imprudent risk, there is absolutely nothing that the auditor can do as long as the client is accounting and disclosing properly.

As an example, Corzine's imprudent decisions to load up on European debt investments - as long as MF Global properly reported their holdings and disclosed concentration of credit risk there is nothing an auditor can do about it.

 

[Brat]

pb4uaki is spot on.